President Donald Trump is always up with something new and interesting, and this time it is the tax industry that has some surprises in the form of tax amendments. Irrespective of the industry type, every business and individual is going to get affected by the new tax laws which came into effect from Jan 1, 2020.
This makes it imperative for everyone to carefully go through the amendments and prepare and file their taxes in compliance with the same. So, let’s get started and figure out in detail as to what is all included in the new tax amendments.
Top Tax Amendments in 2020
- Elevated Minimum Wages:
As of January 1, the minimum wage approved by state legislatures has gone up to $15 on the minimum side in 13 states, which includes New Jersey, California, Massachusetts, Maryland, Illinois, and more. In other states like Washington, D.C., Oregon, Connecticut, etc., an increase in the minimum wage is expected to occur later in the year. There are many businesses that pay their hourly workers more than the minimum amount decided. Still, when there is an increase in the minimum wage, a lot of owners give their workers a raise owing to the tight labor market and competitiveness.
- Refined Overtime Rules:
With new overtime rules in place, almost 1.3 million workers have benefited from the same. Now, not only the workers who earn $23,660 annually or $455/week are eligible for a raise but also the ones who earn $35,568 annually or $684/week. Manufacturers, restaurants, and retailers are the ones that are most likely to get affected by this change since they now have to pay overtime to a worker after 40 hours/week. This change might be easier for larger corporations to adjust, but it might create some difficulties for small companies. So, it will come as no surprise if such owners limit the hours of a worker in order to avoid paying as per the new overtime rules.
- New W-4 Forms:
New W-4 forms have been issued by the IRS in 2020, making changes to the method of withholding taxes from the Pay of employees. Earlier, this depended on the withheld calculations made against the paychecks, but now it is going to focus on the tax returns of the employees. The new employees or staffers who wish to make a change with their withholding have to complete the W-4 forms, with current employees not requiring to do the same. For small businesses that do not use automated payroll software, they can take help from the IRS calculators to compute withholding for the new W-4 forms.
Corporate and Individual Income Tax Rate Changes State-wise w.e.f. January 1, 2020
- Revised Tax Brackets:
Every year, some adjustments are made by the IRS to the tax brackets and following are the changes made to the tax brackets in 2020:- Income Limits and Tax Brackets for a Married couple
- 10%- $19,750 or less
- 12%- $19,750 – $80,250
- 22%- $80,250 – $171,050
- 24%- $171,050 – $326,600
- 32%- $326,600 – $414,700
- 35%- $414,700 – $622,050
- 37%- $622,050 and above
- Standard Deduction:
If we talk about the standard deductions for 2020, an increase can be seen between $200 and $400, along with the other changes:-
- With a $200 increase over last year, single taxpayers can now subtract $12,400.
- With a $400 increase over last year, a married couple can now subtract $24,800.
- With a $300 increase over last year, ahead of household filing can now subtract $18,650.
- With a $200 increase over last year, a married couple filing separately can now subtract $12,400.
It is actually the low-income workers who can receive maximum benefits from the income tax credit. The credit amount, direct payment from the Treasury Department, differs as per the family size, along with the possibility of a single worker becoming eligible. For the credit claim, filers are limited to the following income:-
- Single, widowed, or head of household- $15,270 (if no children)
- Jointly filed by married couples- $20,950 (if no children)
Note: Where children reside in a household, there is a rise in the income limits for the income tax credit, which is earned.
- Retirement Accounts:
Annual adjustments are made by the IRS against the amount deposited by savers to 401(k)s, IRAs, and other accounts of retirement. As far as the IRAs are concerned, the deposit amount remains the same. Up to $6000 can be deposited and deducted by workers under 50, and the ones above 50 can deposit up to $7000. However, the deposit amount to 401(k) has been increased by $500 by the IRS for 2020, letting workers under 50 to deposit $19,500 and the ones above 50 to deposit $26,000.
Impact on International Business
- Annual Gifts’ Exclusion to Noncitizen Spouses:
The regular annual exclusion for gift tax will be $15,000 in 2020, and for noncitizen spouses will be $157,000.
- Housing Cost and Foreign Earned Income Exclusion:
In 2020, $15,064 will be the foreign housing cost exclusion amount, and $107,600 will be the foreign earned income exclusion amount.
- Foreign Gifts’ Reporting:
It is mandatory for a U.S. person to report each ’foreign gift’ to the IRS if the total amount of the ‘foreign gifts’ goes past the threshold amount. One thing to note here is that the businesses that are exempt under Internal Revenue Code Section 501(c) do not fall under this category. Various reporting thresholds are applied against the gifts received from:
- Foreign corporations or partnerships
- Foreign estates or nonresident alien individuals
For gifts received from a foreign estate or nonresident alien individual, reporting is essential only if the total amount of gifts from that individual goes past $100,000 during that tax year. For gifts received from foreign partnerships or corporations, the threshold amount to be reported will be $16,649 in 2020 ( against the $16,388 amount in 2019).
- Deduction for Corporations and Pass-Throughs:
Pass-through businesses comprise small businesses in the form of sole proprietorships and partnerships, limited liability companies, and S-corps. Pass-throughs account for almost 95% of U.S. businesses, which get a 20% deduction with the new law. Limitations are only on businesses that are service-based like accounting and law firms and making more than $315,000/year ($157,500 if single). As far as the C corporations are concerned, the tax rate has come down from 35% to 21%.
- Standard Mileage Rates set by the IRS for 2020:
The optional standard mileage rates set by the IRS to calculate the deductible operating costs on an automobile for charitable, business, moving, or medical purposes. As of January 1, 2020, the standard rates for mileage for the use of a van, panel, car, or pickup truck is:-
- 57.5 cents/ mile driven for commercial use (against the 59 cents/mile rate in 2019)
- 17 cents/mile driven for moving or medical purposes (against the 20 cents/mile rate in 2019)
- 14 cents/mile driven for serving charitable institutes
Important Deadlines as per the Date:
1. January 15, 2020:
For paying the estimated tax payment for the fourth quarter for the tax year 2019.
2. January 31, 2020:
For businesses to provide bank interest, dividends, 1099 Forms reporting, distributions from a retirement plan1, non-employee compensation, etc., and for employers to send W-2 forms to their employees.
3. February 18, 2020:
For financial institutions to send Form 1099-S relating to transactions of real estate, Form 1099-B relating to mutual funds, bonds, or sales of stock from a brokerage account, and Form 1099-MISC if the payments are reported by the sender in boxes 140 or 8.
4. February 28, 2020
For businesses to send Forms 1096 and 1099 to the IRS.
5. March 16, 2020:
For requesting an automatic five-month extension time to file (Form 7004) for businesses using the calendar year as the tax year and corporate tax returns (Forms 1120-S, 1120-A, and 1120) for the year 2018.
For requesting an automatic five-month extension time to file (Form 7004)1 and partnership tax returns (Form 1065).
6. April 15, 2020:
For requesting an automatic extension time (Form 4868) and filing individual tax returns (Form 1040) for the year 2018, making a contribution to traditional Health Savings Account, SEP-IRA, IRA, solo 401(k), or Roth IRA for the 2019 tax year. If you get an extension, you can fund a SEP-IRA or solo 401(k) until October 15.
For requesting an automatic extension time (Form 7004)1 and to file estate income tax or trust income tax returns (Form 1041).
7. June 1, 2020:
For financial organizations to mail Form 5498 for reporting balances in an individual retirement account (IRA)5.
8. June 15, 2020:
For U.S. citizens living in other countries to file Form 4868 for an automatic 4-month extension1 and single tax returns.
9. September 15, 2020:
For filing corporate tax returns for the year 2019 against a requested extension. (Forms 1120-S, 1120-A, 1120)6
10. October 1, 2020:
For small employers or self-employed persons to establish a SIMPLE-IRA7.
11. October 15, 2020:
For filing an electronic tax return, individual tax returns (Form 1040), and funding a solo 401(k) or SEP-IRA or tax year 2019 against a requested extension
This brings us to the conclusion that multiple amendments have been made to the tax laws, which will affect businesses and individuals differently. It is imperative that changes to the tax laws are being adhered to by anyone who is filing taxes, along with taking care of the deadlines to avoid an IRS penalty. Are you facing difficulties in preparing your taxes owing to a lack of time, skills, and expertise or keeping compliance with the tax laws and amendments? If yes, join hands with Accounting To Taxes, having more than 11-years of experience in providing professional accounting and tax outsourcing solutions to individuals and businesses worldwide. Get in touch today to start your free trial!
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